FBAR

FBAR is the Foreign Bank and Financial Account Report. FBAR rules are set forth in the Bank Secrecy Act, first enacted by Congress in 1970, the responsibility for enforcing these rules was given to IRS in 2003.

The FBAR requires that all U.S. Person report any financial interest or authority, over a financial account in a foreign country, with an aggregate value over $ 10,000 at any time during the year. The report is filed on form FinCEN 114 which replaces the form TD F 9022.1 which was used for reports filed prior to July 2013. The form must be filed electronically on or before June 30th each year. No filing extensions are available. The law also requires tax payers disclose on their federal tax return that they have foreign financial accounts of $10,000 or more on their federal income tax return. This in generally done by marking the appropriate box on Schedule B. Taxpayers who fail to disclose the account on their federal income tax return could be subject to criminal sanctions for filing a false tax return.

Reporting is required of all U.S. Persons with a financial interest or authority over a foreign account. U.S. Persons include: U.S. Citizens whether they live inside or outside the U.S., Resident Aliens, U.S. Corporations, U.S. Limited Liability Companies, U.S. Partnerships, U.S. Trusts and U.S. Estates.

A U.S. Person has a financial interest in a foreign account if he or she is the legal or beneficial owner of a foreign account or they have effective control of the account even if said control is through a third party. A person can also be considered to have financial interest in or control over a foreign account by attribution. Reporting rules require a person serving as a shareholder, partner or trustee to report foreign accounts they control through said entities, if the owner of the account is (a) a person acting as an agent on behalf of the U.S. Person, (b) a corporation where the U.S. Person owns, directly or indirectly, more than 50 percent of the outstanding stock, (c) a partnership in which the U.S. Person owns more than 50 percent of the profits, or (d) a trust in which a U.S. Person has either a present interest in more than 50 percent of the assets or from which the U.S. Person receives more than 50 percent of the income.

Non-owners with authority over a foreign account are also subject to the FBAR reporting rules. Authority means the U.S. Person has the ability to order a distribution or disbursement of funds or other property held in the account.

Financial accounts in a foreign country are broadly defined as any asset account and encompasses simple bank accounts (checking or savings), as well as securities or custodial accounts. It also includes a life insurance policy or other type of policy with an investment value (i.e., surrender value).

The $10,000 filing threshold applies to the aggregate of the highest amounts held in all accounts at any time during the year. So an individual that had three foreign accounts that each had a maximum value of $4,000 during they would meet the FBAR filing requirement due to the aggregate value being $12,000.

Failure to file as required can result in substantial penalties. civil penalties of up to $10,000 may be imposed on nonwillful violations. This penalty may be avoided if there was reasonable cause and the U.S. Person reported the income earned on the account. The penalty for willful violations is far more severe. It is equal to the greater of $100,000 or 50 percent of the balance of the account at the time of the FBAR violation. This 50% per year penalty could result in a taxpayer with an account containing $1,000,000 being assessed a penalty of $1,500,000 because he failed to file returns for three years on the same account! Effectively creating a 150% penalty (see the case of United States v. Zwerner.) No reasonable cause exception exists for a willful violation. The IRS has six years to assess a penalty against a taxpayer that violates the FBAR reporting rules.

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